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May 21st, and our reliable friends at Standard and Poors are at it again. Debt issued by the United Kingdom has been effectively downgraded (which I think is what these rating guys mean when they say "outlook negative"), due in measure to the fact that the United Kingdom has issued so much of it. This certainly opens the door to a downgrade of United States debt - indeed, many other countries' debt as well. Now if this doesn't roil the markets, what will. The safest assets on the planet.... no longer as safe?!?!?!? EEEEEEEEK!!!!!!

The Dow Jones Industrial Average is down on the news, sure, by a mere 100 points. What is really going on here? Why shouldn't it be down about 500 points at least? Why is there no panic? Why? There are several possible reasons.

First, maybe nobody trusts rating agencies. They have been so spectacularly wrong over the last decade, I suspect they have no credibility, or only limited credibility, in the market place.

Second, and on a similar note, maybe the market has figured out something about debt that the rating agencies haven't. See, when you can borrow money for free on an inflation-adjusted basis, and invest it in anything earning any positive return, you do it because doing it makes you money. Okay, so thanks to the global financial panic, investors are happy to actually PAY the United Kingdom to borrow their money. I think I would downgrade the United Kingdom if they DIDN'T borrow more. Because the fact is, when the government spends, the economy feels it. And it feels good. It generates returns. And those get taxed. And the government makes money. Lots of it. Sure, takes a little while, but with a virtually infinite holding period, a government like the United Kingdom can afford to be patient when it comes to waiting for those returns. I just don't think that Standard and Poors gets that. Maybe that explains the market's yawn-like reaction to this downgrade.

Third, maybe the whole reason for today's early morning sell off has nothing to do with these rating at all. Many equities indexes in the US and abroad either hit or came within spitting distance of their 200 day moving averages. Some indexes abroad, particularly in China and the emerging markets, are well above these moving averages. In the context of a bear market, the 200 day moving average offers stiff technical resistance, which is what we are probably seeing right now. Suffice it to say that if the broader markets cannot join the small cap and emerging markets to break above their 200 day moving averages, we're probably looking at a leg lower. If, on the other hand, they do break above, we may be in the earlier stages of a new bull market. My best guess (and it is a guess) is that we break lower, maybe test the 50 day moving averages as support, before resuming an attack on the 200 day moving averages.

I diverge from the point, however. The markets, it appears, can take wretched news in stride now without dropping 10% in a day, which at least shows that the panic of last year is abating. If that trend continues, we may see a return of bank confidence and, ultimately, investor confidence. That said, the day is young.

Nobody wants to argue with the market - at least, not if they can help it. But how do you avoid doing that when you don't have any idea what the market is TRYING to say in the first place? The market speaks with a mouth full of marbles, in obscure languages and after having had too many drinks. Then there's a second problem: assuming you correctly translate the market's incoherent ramblings, how do you figure out WHY it's saying what it's saying?

As to the first problem, I believe that most of the time, technical analysis is a very useful tool to figure out what traders are actually doing, and since these are the guys who set prices, they're basically the market's vocal cords. Technical analysis is descriptive, rather than predictive, so once you decipher the technical signs, that brings you to the next phase of the analysis, which is figuring out what fundamental conditions the market may be reacting to. Do that, and then you can make a somewhat more informed guess about whether these fundamental conditions are likely to persist, and, if so, whether the market's reaction to them is likelier to continue or fade. At least until the unexpectable arrives un-announced, as it inevitably must and will.

What technical signs have shaped up that are worth paying attention to at this moment? I suggest the following several. First, I have been watching the Proshares UltraShort Financ... ETF (NYSEARCA:SKF) with glee. I watch this because fundamentally, the bear market of 2007, 2008 and 2009 is caused by an imbalance in the debt markets (ie., the issuance of too much low quality debt that was inaccurately priced) that lead to a collapse of the global financial system. The system came close to collapsing in 2008, but didn't. Here’s the takeaway: that which does not kill you will make you stronger. Accordingly, because the financial system did not collapse, it will only become stronger. Banks will prosper. And as to that "debt bubble" you hear so much about? Look, the problem wasn't too much debt. The overall quantity of debt is irrelevant. The problem with any bubble is all about incorrect pricing. Credit risk was underpriced in 2007. When stuff is incorrectly priced, all hell breaks loose. And the guys that own the debt get hosed. We saw that with the collapse of the global banking giants like Citigroup.

Back to SKF. It is tanking. The 50 day EMA dropped below the 200 day EMA in a stellar way back in April, and this means that SKF is in a massive bear market. Bear markets tend to last a while, so technically speaking, SKF is likely to go lower still. This bodes rather well for banks and financial institutions. Indeed, we see now that Financials Select Sector SPDR (NYSEARCA:XLF) bounced off $6 a share and is now 100% higher at $12.32 a share today. It's about to pop above the 200 day EMA as well, and if so, it will enter into a technical bull market. Goldman Sachs (NYSE:GS) - fifty day EMA just crossed above the 200 day EMA - technically, this company is in bull market zone already. Goldman is a leader, and where it goes, other financial firms often follow.

So, if the financials are technically poised in fresh new bull markets, what does that say about the financial crisis? It says it's over, and the players are getting stronger. And the underlying debt bubble? Well, it is hard to say credit risk is underpriced in the debt markets when you've got credit default swap spreads way up in the stratosphere. I really have no idea, but when it comes to bank stocks, it seems like the market is saying the price of credit risk is appropriate now, so the owners of these credit-linked assets are likelier to make, rather than lose, money. And if the debt bubble and ensuing financial crisis drove the market down, then the removal of these causes should drive the market up - unless something new happens which, eventually, is certain to happen.

I watch the Chicago Volatility Index (VIX). After hitting an historic high last year, the sucker has dropped. Quite a bit, in fact. So much so that the 50 day EMA is lower than the 200 day EMA now. Long options on the VIX, and VIX-linked exchange traded funds, are now firmly in bear market territory, and, trends being things that last a while most of the time, the VIX seems poised to drop further still. When the VIX is low, equities are usually going up because bull markets are less volatile than bear markets. If the VIX is now likelier than not to drop from a technical perspective, the way to interpret this message is that the market is expecting less volatility and, accordingly, may be expecting gains, a protracted flat period, or a slow, orderly grinding down period. At a minimum, the market is not expecting the wild crashes we saw last year.

I also like to follow ETFs with the highest Beta - stuff like emerging markets. Why? Small caps and emerging markets tend to be leading indicators for the broader markets. Ishares FTSE China 25 (NYSEARCA:FXI) - high above the 200 day EMA, 50 day EMA closing in on the 200 day. This security appears poised (almost, almost, almost) to enter a new technical bull market. Comparable technical postures now exist with IShares MSCI Emerging Markets (NYSEARCA:EEM), IShares Latin America 40 Index (NYSEARCA:ILF), Russell 200 Ishares (NYSEARCA:IWM), IShares MSCI Pacific Ex-Japan (NYSEARCA:EPP). We are not there yet. To really confirm a technical upward trend, you want to see that 50 day EMA go above the 200 day EMA with some conviction, some heavy volume. This has not yet come to pass, but we are close.

Close enough to conclude that we are now at a major inflection point. If these securities cannot confirm an upward trend, ick. You'll see a stunning collapse. Why? Because when the bulls take their best shot at the bears and miss? They look like sissies who cannot fight, and the playground bullies will just knock them flat. And if, on the other hand, FXI, EEM, EPP, ILF, IWM do break into technical upward trends, then it is likelier that they will go higher still, possibly bringing the broader markets along for the ride.

So what does this all add up to in terms of what the market is actually "saying"? It is saying "watch out". Inflection points are risky places to be. Risky places are also those places that offer the highest returns, so, for some of us, it is exactly the time to place bets. For the rest of us who would rather leave the first and last 20% on the table and take that easy 60% in the middle, this is time to get out and watch what happens next.

There's that old adage that when short-term trading momentum overcomes long-term trading momentum in a security's pricing, traders take notice.There are various ways to measure when, precisely, such an event occurs, but a common approach is to look at a fifty day and two hundred day exponential moving average of the security’s price (hereafter, the “EMA”). If, for instance, the fifty day EMA drops below the two hundred day EMA, the momentum of the security’s price can be interpreted as negative, meaning, in layman's terms, that sucker is poised to drop like a stone. Many traders react accordingly, in a manner comparable to, say, a hungry lion in the midst of sick, young, or aging herbivors (true - everyone thinks lions mostly loll around waiting for a pride of lionesses to do the hunting, but when lions DO actually hunt, holy cow, it's something terrible to see).

With that bit of zoological background in mind, it’s illustrative to look at one particular exchange traded fund – Ultrashort Financials ProShares (NYSEARCA:SKF). After bumping up to $262 a share back in November of last year, and then hitting a lower high at $250 a share in early March of this year, SKF now trades at about $88 a share. SKF has, in other words, established a pattern of lower highs and lower lows – which when you get right down to it is more or less what a bear market is all about. And, not coincidentally, the fifty day EMA has now crossed below the 200 day EMA. You might say the price of SKF is ripe to fall off a cliff. As I write this article, Wells Fargo (NYSE:WFC) has posted a shocking $3 billion profit. SKF is falling in pre-market trading like, well, a sick and aging herbivor.

This all comes as good news for those who’d like to see some recovery in the stock price of financial firms, because when SKF rallies, the composite price of financial stocks tends to sink. Considerably. The converse pattern is likely to hold true going forward, and so, if the imminent demise of SKF proves true, it is likely the price of many banking and financial firms should, on the whole, improve significantly from here.

There’s a few other hopeful signs, including what happened yesterday with the CBOE Volatility Index (hereafter, the “VIX”, and which can be traded using Ipath exchange traded notes such as VXX). The VIX measures volatility on the equities markets, and, since stock prices tend to fall more rapidly they gain, a high level on the VIX often accompanies or presages falling equities markets, whereas a lower level on the VIX tends to accompany rising equities markets. After hitting an all time high of about 80 back in October of last year, and then bumping up again to about 80 in late November of last year, the VIX failed to set a higher high. It has since dropped to around the 40 level, where it has been bumping around for most of this year. In the latter part of March, the VIX observed its fifty day EMA twice as trading resistance, and failed to observe support at its 200 day EMA, establishing a pattern of growing price resistance, and failing price support. It seemed like there was strong support for the VIX at 40. Until yesterday. That old VIX broke through this support level and dropped to 38.85. The case for a lower level on the VIX going forward just gets stronger and stronger, at least from a technical trading perspective.

If we do in fact see the VIX fall, that would potentially bode well for equities markets in general, and for the equity of financial firms more specifically. I say that because it’s plenty hard to make a case that bank stocks could rally if the rest of the market isn’t following along. So, I'm going to posit that any bullish development for the equities markets in general at least removes one barricade against rising stock prices for banks.

To sum up, it wouldn’t make sense to start buying up bank shares on the basis of these technical theories alone, but any technical signs of a turnaround in share prices for banks and other financial industry players represents one of the few bright lights in what at times appears to be sea of utter darkness in the capital markets. But here on the Savanna, we know that at the end of every famine, there comes a feast. We may not see them yet, but have no doubt that the lions are watching with keen and unsympathetic eyes... making woofing sounds... ropes of glistening saliva forming at the corners of their mouths.....

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